Business must plan how costs will impact their profitability in this environment of inflation. The question that must be considered is whether cost increases are temporary, long-term, or one-time (step function increase). Let’s explore some cost areas and consider the likely outcome.
Wages are rising at the fastest pace in years particularly for lower paying jobs. Wage growth has been limited for many decades, so it is a long time coming. Whether wages will rise continuously will depend largely on monetary policy. That said, the Federal Reserve, who sets United States interest rates has a strong aversion to inflation. Therefore, they will likely raise rates should inflation persist.
The bigger question is whether wages will go back down. If you look at research on wages over time (see this chart from the Social Security Administration), you will note that in general wages don’t go down. Businesses typically lay off workers rather than reduce pay in an economic downturn.
Expect higher wages to stay.
We’ve seen massive spikes in raw materials as pent-up demand has been unleashed with the end of COVID restrictions. We are seeing those prices come back down:
- Lumber Prices Are Falling Fast, Turning Hoarders Into Sellers
- Commodities from copper to corn tumble on China crackdown, rising dollar
Commodities will affect manufacturing costs. It’s hard to believe they will stay high forever, but the outlook is uncertain and may prolong.
Expect higher prices than pre-COVID, with future price stability at a level to be determined.
Oil prices affect shipping which affects any product-based business. We’re experiencing some of the highest prices in recent years. Again, there is a lot of pent-up demand for travel and goods. We’ve seen high prices in the past and those prices have come back down. On an inflation-adjusted basis, gasoline is fairly stable (see Gasoline Prices Adjusted for Inflation).
Prices will likely remain high and could go higher with the resumption of normal economic activity. More likely they will stabilize over a longer period of time.
Business Costs Inflation Summary
If you’re a small business and unsure how to plan with inflation and higher business costs, consider this:
- Higher prices are likely here for at least multiple quarters (see my article on Inflation or Reflation)
- Some prices driven by commodities will likely go down and stabilize
- Labor costs will likely stick